UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2006
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number: 000-12196
NVE Corporation
(Exact name of registrant as specified in its charter)
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Minnesota |
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41-1424202 |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S.
Employer Identification No.)
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11409
Valley View Road, Eden Prairie, Minnesota
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55344 |
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(Address
of principal executive offices)
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(Zip Code) |
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(952)
829-9217
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Registrant’s
telephone number, including area code
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Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. [X] Yes
[ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer [ ] |
Accelerated
filer [ ]
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Non-accelerated
filer [X]
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
Indicate
the number of shares outstanding of each of the issuer's classes of common stock,
as of the latest practicable date.
Common Stock, $0.01 Par Value - 4,627,383 shares outstanding as of January 12, 2007
NVE CORPORATION
INDEX TO FORM 10-Q
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Item 1. Financial Statements.
NVE CORPORATION
BALANCE SHEETS
DECEMBER 31, 2006 AND MARCH 31, 2006
(Unaudited)
Dec. 31, 2006 March 31, 2006*
-------------- --------------
ASSETS
Current assets
Cash and cash equivalents $ 423,282 $ 1,288,362
Short-term investments 838,579 1,248,103
Accounts receivable, net of allowance for
uncollectible accounts of $15,000 1,907,637 1,667,029
Inventories 2,189,125 2,149,769
Deferred tax assets 1,598,321 1,576,472
Prepaid expenses and other assets 275,718 231,412
-------------- --------------
Total current assets 7,232,662 8,161,147
Fixed assets
Machinery and equipment 4,395,392 4,149,080
Leasehold improvements 413,482 413,482
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4,808,874 4,562,562
Less accumulated depreciation 3,707,237 3,319,651
-------------- --------------
Net fixed assets 1,101,637 1,242,911
Long-term investments 14,710,657 8,354,861
-------------- --------------
Total assets $ 23,044,956 $ 17,758,919
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 502,480 $ 399,762
Accrued payroll and other 524,084 470,392
Deferred revenue - 77,373
Capital lease obligations - 33,281
-------------- --------------
Total current liabilities 1,026,564 980,808
Shareholders' equity
Common stock 46,274 46,150
Additional paid-in capital 18,018,851 16,042,637
Accumulated other comprehensive loss (129,795) (166,908)
Retained earnings 4,083,062 856,232
-------------- --------------
Total shareholders' equity 22,018,392 16,778,111
-------------- --------------
Total liabilities and shareholders' equity $ 23,044,956 $ 17,758,919
============== ==============
*The March 31, 2006 Balance Sheet is from the audited financial statements
contained in our Annual Report on Form 10-K for the year ended March 31, 2006.
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See accompanying
notes.
NVE CORPORATION
STATEMENTS OF INCOME
QUARTERS ENDED DECEMBER 31, 2006 AND 2005
(Unaudited)
Quarter Ended December 31
2006 2005
------------ ------------
Revenue
Product sales $ 3,402,937 $ 1,742,163
Contract research and development 459,112 868,119
------------ ------------
Total revenue 3,862,049 2,610,282
Cost of sales 1,385,163 1,308,752
------------ ------------
Gross profit 2,476,886 1,301,530
Expenses
Research and development 544,779 342,616
Selling, general, and administrative 479,387 434,183
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Total expenses 1,024,166 776,799
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Income from operations 1,452,720 524,731
Interest income 157,337 88,168
Interest expense - (1,336)
Other income - 3,101
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Income before taxes 1,610,057 614,664
Provision for income taxes 558,504 213,279
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Net income $ 1,051,553 $ 401,385
============ ============
Net income per share - basic $ 0.23 $ 0.09
============ ============
Net income per share - diluted $ 0.22 $ 0.09
============ ============
Weighted average shares outstanding
Basic 4,620,835 4,576,454
Diluted 4,786,868 4,677,712
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See accompanying
notes.
NVE CORPORATION
STATEMENTS OF INCOME
NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(Unaudited)
Nine Months Ended Dec. 31
2006 2005
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Revenue
Product sales $10,233,325 $ 5,548,085
Contract research and development 1,662,287 3,139,667
------------ ------------
Total revenue 11,895,612 8,687,752
Cost of sales 4,224,165 4,617,543
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Gross profit 7,671,447 4,070,209
Expenses
Research and development 1,641,637 1,237,355
Selling, general, and administrative 1,421,332 1,238,757
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Total expenses 3,062,969 2,476,112
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Income from operations 4,608,478 1,594,097
Interest income 418,683 233,606
Interest expense (589) (5,084)
Other income 25,246 39,667
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Income before taxes 5,051,818 1,862,286
Provision for income taxes 1,824,988 684,284
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Net income $ 3,226,830 $ 1,178,002
============ ============
Net income per share - basic $ 0.70 $ 0.26
============ ============
Net income per share - diluted $ 0.67 $ 0.25
============ ============
Weighted average shares outstanding
Basic 4,618,086 4,573,173
Diluted 4,784,118 4,674,431
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See accompanying
notes.
5
NVE CORPORATION
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005
(Unaudited)
Nine Months Ended Dec. 31
2006 2005
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OPERATING ACTIVITIES
Net income $ 3,226,830 $ 1,178,002
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 392,777 426,450
Gain on sale of fixed assets - (25,500)
Stock-based compensation 128,203 -
Excess tax benefits (1,591,076) -
Deferred income taxes 1,780,688 668,334
Changes in operating assets and liabilities:
Accounts receivable (240,608) 544,105
Inventories (39,356) (461,182)
Prepaid expenses and other assets (44,306) (7,438)
Accounts payable and accrued expenses 156,410 (10,919)
Deferred revenue (77,373) (168,340)
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Net cash provided by operating activities 3,692,189 2,143,512
INVESTING ACTIVITIES
Proceeds from the sale of fixed assets - 25,500
Purchases of fixed assets (252,604) (20,573)
Maturities of investment securities 1,054,686 -
Purchases of investment securities (6,943,625) (2,255,922)
------------ ------------
Net cash used in investing activities (6,141,543) (2,250,995)
FINANCING ACTIVITIES
Net proceeds from sale of common stock 26,479 28,313
Excess tax benefits 1,591,076 -
Repayment of capital lease obligations (33,281) (50,026)
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Net cash provided by (used in) financing activities 1,584,274 (21,713)
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Decrease in cash and cash equivalents (865,080) (129,196)
Cash and cash equivalents at beginning of period 1,288,362 1,240,205
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Cash and cash equivalents at end of period $ 423,282 $ 1,111,009
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 589 $ 5,084
Income taxes $ 44,300 $ 15,950
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See accompanying
notes.
6
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006
(Unaudited)
NOTE 1. NATURE OF BUSINESS
We develop, manufacture, and sell "spintronics" devices, a nanotechnology which relies on electron spin rather than electron charge to acquire, store, and transmit information.
NOTE 2. INTERIM FINANCIAL
INFORMATION
The accompanying unaudited financial statements of NVE Corporation are consistent with accounting principles generally accepted in the United States and reporting with Securities and Exchange Commission ("SEC") rules and regulations. In the opinion of management, these financial statements reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the financial statements. Although we believe that the disclosures are adequate to make the information presented not misleading, it is suggested that these unaudited financial statements be read in conjunction with the audited financial statements and the notes included in our latest annual financial statements included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2006. The results of operations for the quarter ended December 31, 2006 are not necessarily indicative of the results that may be expected for the quarter or full fiscal year ending March 31, 2007.
NOTE 3. INVESTMENTS
We classify and account for debt and equity securities in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Securities with original maturities greater than three months and remaining maturities less than one year are classified as short-term investments; securities with remaining maturities greater than one year are classified as long-term investments.
Our entire portfolio of short-term and long-term investments consists of government- and corporate-backed notes and bonds, and is classified as available for sale; therefore securities are recorded at fair market value and any associated unrealized gain or loss, net of tax, is included as a separate component of shareholders' equity, "Accumulated other comprehensive income."
NOTE 4. COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
Quarter Ended December 31
2006 2005
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Net income $ 1,051,553 $ 401,385
Unrealized loss from investments (13,265) (19,568)
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Comprehensive income $ 1,038,288 $ 381,817
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Nine Months Ended December 31
2006 2005
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Net income $ 3,226,830 $ 1,178,002
Unrealized gain from investments 37,114 7,906
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Comprehensive income $ 3,263,944 $ 1,185,908
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NOTE 5. INVENTORIES
Inventories
consisted of the following:
December 31 March 31
2006 2006
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Raw materials $ 778,071 $ 703,407
Work-in-process 843,571 740,578
Finished goods 772,483 850,784
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2,394,125 2,294,769
Less obsolescence reserve (205,000) (145,000)
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$ 2,189,125 $ 2,149,769
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NOTE 6. STOCK-BASED COMPENSATION
Effective April 1, 2006 we adopted the provisions of, and account for stock-based compensation in accordance with, Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment. Under the fair value recognition provisions of SFAS No. 123(R), we measure stock-based compensation cost at the grant date based on the fair value of the award and recognize the compensation expense over the requisite service period, which is generally the vesting period. We estimate pre-vesting option forfeitures at the time of grant by analyzing historical data and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Ultimately, the total expense recognized over the vesting period will only be for those awards that vest. We elected the modified-prospective method of adopting SFAS No. 123(R), under which prior periods are not retroactively revised. The valuation provisions of SFAS No. 123(R) apply to awards granted after the April 1, 2006 effective date. Stock-based compensation expense for awards that were granted prior to the effective date but remain unvested on the effective date is being recognized over the remaining service period using the compensation cost estimated for our SFAS No. 123 pro forma disclosures.
Stock Option Plan
Our 2000 Stock Option Plan, as amended, provides for issuance to employees, directors, and certain service providers of incentive stock options and nonstatutory stock options. Generally, the options may be exercised at any time prior to expiration, subject to vesting based on terms of employment. The period ranges from immediate vesting to vesting over a five-year period. The options have exercisable lives ranging from one year to ten years from the date of grant, and are generally not eligible to vest early in the event of retirement, death, disability, or change in control. Exercise prices are not less than fair market value of the underlying Common Stock at the date the options are granted.
On March 28, 2005, in anticipation of the impact of SFAS No. 123(R), the Compensation Committee of our Board of Directors approved an immediate and full acceleration of vesting of all stock options outstanding under our Stock Option Plan with an exercise price greater than $20 per share. As a result of the acceleration, out-of-the-money options to purchase 42,125 shares of our Common Stock became immediately exercisable as of March 28, 2005.
On January 1, 2006 we terminated our Employee Stock Purchase Plan in anticipation of SFAS No. 123(R), which we believed otherwise would have required recognizing expenses associated with the issuance of shares under SFAS No. 123(R).
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Valuation assumptions
We
use the Black-Scholes standard option pricing model to determine the fair value
of stock options. No options were granted during the quarter ended December
31, 2006. The following assumptions were used to estimate the fair value of
options granted during the periods indicated:
Quarters Ended Dec. 31 9 Months Ended Dec. 31
2006 2005 2006 2005
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Risk-free interest rate n/a 3.9 % 4.9 % 3.9 %
Expected volatility n/a 83.6 % 80.8 % 85.5 %
Expected life (years) n/a 10.0 6.5 10.0
Dividend yield n/a 0 % 0 % 0 %
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The determination of the fair value of the awards on the date of grant using the Black-Scholes model is affected by our stock price as well as assumptions of other variables, including projected employee stock option exercise behaviors, risk-free interest rate, and expected volatility of our stock price in future periods. Our estimates and assumptions affect the amounts reported in the financial statements and accompanying notes.
Expected life
We analyze historical employee exercise and termination data to estimate the expected life assumption. We believe historical data currently represents the best estimate of the expected life of a new employee option. Prior to adopting SFAS No. 123(R), we estimated that the expected life was equal to the option term. For determining the fair value of options under SFAS No. 123(R) we use different expected lives for officers and directors than we use for our general employee population. We examined the historical pattern of option exercises to determine if there was a discernible pattern as to how different classes of employees exercised their options. Our analysis showed that officers and directors held their stock options for a longer period of time before exercising compared to the rest of our employee population.
Risk-free interest
rate
The rate is based on the yield of U.S. Treasury securities on the grant date for maturities similar to the expected lives of the options.
Volatility
We use historical volatility to estimate the expected volatility of our common stock.
Dividend yield
We assume a dividend yield of zero because we do not anticipate paying dividends in the foreseeable future.
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Expenses related to share-based payments
The following table shows the effect of our adoption of SFAS No. 123(R) on our net income and earning per share for the quarter and nine months ended December 31, 2006. Expenses and costs related to share-based payments are presented in the same line or lines as cash compensation paid to the same employees. The effect of SFAS No. 123(R) is included in selling, general, and administrative expenses and presented in the line titled "Stock-based compensation" on our Statements of Cash Flows:
Quarter Ended 9 Months Ended
Dec. 31, 2006 Dec. 31, 2006
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Effect of SFAS No. 123(R) on net income (6,263) (87,234)
Effect of SFAS No. 123(R) on net income
per share:
Basic $ (0.00) $ (0.02)
Diluted $ (0.00) $ (0.02)
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Prior to the adoption of SFAS No. 123(R), we presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. SFAS No. 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows.
Prior to April 1, 2006 we accounted for our stock-based employee compensation plans under the recognition and measurement principles of APB Opinion No. 25 and related interpretations. The following table illustrates the effect on net earnings and net earnings per share for the quarter and nine months ended December 31, 2005 if we had applied the fair value recognition provisions of SFAS No. 123 to our stock-based employee compensation:
Quarter Ended
Dec. 31, 2005
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Net income:
As reported $ 401,385
Pro forma adjustment for stock options (92,474)
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Pro forma net income $ 308,911
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Net income per share:
Basic - as reported $ 0.09
Basic - pro forma $ 0.07
Diluted - as reported $ 0.09
Diluted - pro forma $ 0.07
9 Months Ended
Dec. 31, 2005
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Net income:
As reported $ 1,178,002
Pro forma adjustment for stock options (207,877)
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Pro forma net income $ 970,125
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Net income per share:
Basic - as reported $ 0.26
Basic - pro forma $ 0.21
Diluted - as reported $ 0.25
Diluted - pro forma $ 0.21
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Tax effects of stock-based compensation
Deferred taxes for the quarter and nine months ended December 31, 2006 increased by $1,903 and $40,968 due to stock-based compensation.
General stock option information
No options were issued for the quarter ended December 31, 2006. The following table summarizes stock option activity during the nine months ended December 31, 2006:
Weighted
Average
Options Exercise
Outstanding Price
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Balance at March 31, 2006 312,130 $ 14.47
Granted 12,000 $ 20.12
Exercised (12,430) $ 2.13
Terminated - -
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Balance at December 31, 2006 311,700 $ 15.18
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A summary of our nonvested shares as of December 31, 2006, and changes during the nine months ended December 31, 2006, is presented below:
Weighted
Average
Grant-Date
Nonvested Shares Shares Fair Value
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Nonvested at March 31, 2006 3,500 $ 6.05
Granted 12,000 $ 20.12
Vested (9,250) $ 17.46
Forfeited - $ -
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Nonvested at December 31, 2006 6,250 $ 16.18
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The following tables summarize information concerning stock options outstanding and exercisable at December 31, 2006:
Options Outstanding Options Exercisable
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Weighted
Weighted Remaining Weighted
Average Contractual Average
Ranges of Number Exercise Life Number Exercise
Exercise Prices Outstanding Price (years) Outstanding Price
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$ 0.86 - 10.00 95,950 $ 6.25 4.0 94,200 $ 6.25
10.01 - 20.12 165,750 15.53 7.8 161,250 15.40
21.99 - 58.27 50,000 31.16 7.3 50,000 31.16
--------------- ----------- -------- ----------- ----------- --------
311,700 $ 15.18 6.5 305,450 $ 15.16
=========== ===========
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The total intrinsic value of options exercised during the nine months ended December 31, 2006 was $399,989. At December 31, 2006 the total intrinsic value of options outstanding was $4,946,515 of which $4,855,481 were exercisable. The total intrinsic value at December 31, 2006 is based on our closing stock price on the last trading day of the quarter for in-the-money options.
NOTE 7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Under SFAS No. 109, Accounting for Income Taxes, stock-based compensation deductions for tax return purposes do not reduce taxes reported for book purposes but are credited to "Additional paid-in capital." Tax provisions of $1,821,656 and $668,334 were credited to "Additional paid-in capital" for the nine months ended December 31, 2006 and 2005.
NOTE 8. CONTINGENCIES
On February 10, 2006 a lawsuit was filed against NVE and certain of its current and former executive officers and directors in the U.S. District Court for the District of Minnesota by an individual shareholder seeking to represent a class of purchasers of our common stock during the period from May 22, 2003 through February 11, 2005. On March 6 and March 7, 2006, two additional lawsuits were filed in the same court by two additional NVE shareholders, with the same proposed class period, purporting to represent the same class. These lawsuits were subsequently consolidated into a single case and a consolidated complaint was filed. The consolidated complaint generally alleges that the defendants violated the Securities Exchange Act of 1934 by issuing material misrepresentations concerning NVE’s projected revenues and product technology, which artificially inflated the market price of our common stock. Two related actions brought by individual shareholders who seek to represent NVE derivatively have been filed in Hennepin County District Court. These related actions were subsequently consolidated into a single case and an amended derivative complaint was filed. The amended derivative complaint generally alleges that certain officers and directors violated their fiduciary duties to the company. We believe the lawsuits are wholly without merit and intend to vigorously defend the actions. We have incurred and expect to continue to incur legal expenses related to these lawsuits. Although insurance may cover a portion of any judgments, if we do not prevail in these lawsuits we may be required to pay substantial amounts which could have a material adverse impact on our future results of operation and financial condition.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation.
Forward-looking statements
Some of the statements made in this Report or in the documents incorporated by reference in this Report and in other materials filed or to be filed by us with the Securities and Exchange Commission as well as information included in verbal or written statements made by us constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to the safe harbor provisions of the reform act. Forward-looking statements may be identified by the use of the terminology such as may, will, expect, anticipate, intend, believe, estimate, should, or continue, or the negatives of these terms or other variations on these words or comparable terminology. To the extent that this Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of NVE, you should be aware that our actual financial condition, operating results and business performance may differ materially from that projected or estimated by us in the forward-looking statements. We have attempted to identify, in context, some of the factors that we currently believe may cause actual future experience and results to differ from their current expectations. These differences may be caused by a variety of factors, including but not limited to competition including entry of new competitors, variations in costs that are beyond our control, adverse federal, state and local government regulations, unexpected costs, lower sales and net income or higher net losses than forecasted, our dependence on significant suppliers, our ability to meet stringent customer technical requirements, our ability to consummate additional license agreements, our ability to continue eligibility for SBIR awards, failure to obtain new customers, the possible fluctuation and volatility of our operating results and financial condition, inability to carry out marketing and sales plans, loss of key executives, and other specific risks that may be alluded to in this Report or in the documents incorporated by reference in this report. Further information regarding our risks and uncertainties, are contained in Item 1A "Risk Factors"of our Annual Report on Form 10-K for the year ended March 31, 2006 and Part II Item 1A of our Quarterly Reports on Forms 10-Q.
General
We develop, manufacture, and sell devices using "spintronics," a nanotechnology we helped pioneer, which utilizes electron spin rather than electron charge to acquire, store and transmit information. We are a licensor of spintronic magnetic random access memory technology, commonly referred to as MRAM, which we believe has the potential to revolutionize electronic memory. We also manufacture high-performance spintronic products including sensors and couplers to revolutionize data sensing and transmission.
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Quarter ended December 31, 2006 compared to quarter ended December 31, 2005
The
table below summarizes certain summary information for various items for the
periods indicated:
Percentage of Revenue Period-
Quarter Ended December 31 to-Period
2006 2005 Change
-------- -------- ---------
Revenue
Product sales 88.1 % 66.7 % 95.3 %
Research and development 11.9 % 33.3 % (47.1)%
-------- --------
Total revenue 100.0 % 100.0 % 48.0 %
Cost of sales 35.9 % 50.1 %
-------- --------
Gross profit 64.1 % 49.9 %
Total expenses 26.5 % 29.8 % 31.8 %
-------- --------
Income from operations 37.6 % 20.1 % 176.9 %
Net interest and other income 4.1 % 3.5 % 74.9 %
-------- --------
Income before taxes 41.7 % 23.6 % 161.9 %
Provision for income taxes 14.5 % 8.2 % 161.9 %
-------- --------
Net income 27.2 % 15.4 % 162.0 %
======== ========
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Total revenue for the quarter ended December 31, 2006 (the third quarter of fiscal 2007) was $3,862,049, an increase of 48% from $2,610,282 for the quarter ended December 31, 2005 (the third quarter of fiscal 2006). The increase was due to a 95% increase in product sales to $3,402,937 from $1,742,163, partially offset by a 47% decrease in contract research and development revenue to $459,112 from $868,119. The increase in product sales was due to increased sales of both spintronic sensors and spintronic couplers. The decrease in contract research and development revenue was due to shifts to company-funded research from contract-funded research and a decrease in U.S. Government contract awards to us.
Gross profit margin increased to 64% of revenue for the third quarter of fiscal 2007 from 50% for the same quarter of fiscal 2006. The increase was due to higher product margins and a more profitable revenue mix consisting of 88% product sales versus 67% in the prior-year quarter.
Research and development expense increased 59% to $544,779 for the quarter ended December 31, 2006 compared to $342,616 for the quarter ended December 31, 2005. The increase was due to efforts to develop new and improved products and a shift to company-funded research from contract-funded research.
Selling, general and administrative expenses for the quarter ended December 31, 2006 increased 10% to $479,387 compared to $434,183 for the quarter ended December 31, 2005. The increase was primarily due to expenses related to Sarbanes-Oxley Section 404 compliance matters. Expenses related to Sarbanes-Oxley Section 404 were approximately $58,000 in the quarter. We had no such expenses in the prior-year quarter.
Interest and other income increased 75% to $157,337 for the quarter ended December 31, 2006 from $89,933 for the quarter ended December 31, 2005. The increase was due to a higher average interest rate as well as an increase in interest-bearing investments, which were purchased primarily with cash generated from operations.
Net income totaled $1,051,553 for the quarter ended December 31, 2006, an increase of 162% compared to $401,385 for the quarter ended December 31, 2005. The increase in net income was primarily due to increases in revenue and gross profit, partially offset by increases in expenses and provision for income taxes.
14
Nine months ended December 31, 2006 compared to nine months ended December 31, 2005
The
table below summarizes certain summary information for various items for the
periods indicated:
Percentage of Revenue Period-
Nine Months Ended Dec. 31 to-Period
2006 2005 Change
-------- -------- ---------
Revenue
Product sales 86.0 % 63.9 % 84.4 %
Research and development 14.0 % 36.1 % (47.1)%
-------- --------
Total revenue 100.0 % 100.0 % 36.9 %
Cost of sales 35.5 % 53.2 %
-------- --------
Gross profit 64.5 % 46.8 % 88.5 %
Total expenses 25.8 % 28.5 % 23.7 %
-------- --------
Income from operations 38.7 % 18.3 % 189.1 %
Net interest and other income 3.7 % 3.1 % 65.3 %
-------- --------
Income before taxes 42.4 % 21.4 % 171.3 %
Provision for income taxes 15.3 % 7.9 % 166.7 %
-------- --------
Net income 27.1 % 13.5 % 173.9 %
======== ========
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Total revenue for the nine months ended December 31, 2006 was $11,895,612, an increase of 37% from revenue of $8,687,752, for the nine months ended December 31, 2005. The increase was due to an 84% increase in product sales to $10,233,325 from $5,548,085, partially offset by a 47% decrease in contract research and development revenue to $1,662,287 from $3,139,667. The increase in product sales was due to increased sales of both spintronic sensors and spintronic couplers. The decrease in contract research and development revenue was due to shifts to company-funded research from contract-funded research and a decrease in U.S. Government contract awards to us.
Gross profit margin increased to 64% for the first nine months of fiscal 2007 from 47% for the first nine months of fiscal 2006. The increase was due to a more profitable revenue mix consisting of a higher percentage of product sales, and increased product margins. Increased product margins were due to price increases for calendar 2006 and deployment of lower-cost coupler designs.
Research and development expenses increased 33% to $1,641,637 for the nine months ended December 31, 2006 compared to $1,237,355 for the nine months ended December 31, 2005. The increase was due to efforts to develop new and improved products and a shift to company-funded research from contract-funded research.
Selling, general and administrative expenses for the nine months ended December 31, 2006 increased 14% to $1,421,332 compared to $1,238,757 for the nine months ended December 31, 2005. The increase was primarily due to expenses of approximately $58,000 related to Sarbanes-Oxley Section 404 compliance matters and a $128,203 non-cash expense recognized under SFAS No. 123(R).
Interest and other income increased 65% to $443,340 for the nine months ended December 31, 2006 from $268,189 for the nine months ended December 31, 2005. The increase was primarily due to a higher average interest rate as well as an increase in interest-bearing investments, which were purchased primarily with cash generated from operations.
Net income totaled $3,226,830 for the nine months ended December 31, 2006 compared to $1,178,002 for the nine months ended December 31, 2005. The increase in net income was primarily due to increases in revenue and gross profit, partially offset by increases in expenses and provision for income taxes.
Diluted net income per share increased to $0.67 for the nine months ended December 31, 2006 from $0.25 for the nine months ended December 31, 2005. The effect of SFAS No. 123(R) was to reduce diluted net income per share by $0.02 for the nine months ended December 31, 2006.
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Liquidity and capital resources
At December 31, 2006 we had $15,972,518 in cash plus investments compared to $10,891,326 at March 31, 2006. Our entire portfolio of short-term and long-term investments is classified as available for sale. The increase in cash plus investments was primarily due to cash generated from operations, partially offset by purchases of fixed assets in the first nine months of fiscal 2007 and payments of capital lease obligations in the first quarter of fiscal 2007.
Accounts receivable increased to $1,907,637 at December 31, 2006 from $1,667,029 at March 31, 2006. The increase was due to increased revenue and the timing of payments under research and development contracts.
We had no deferred revenue at December 31, 2006, compared to $77,373 at March 31, 2006. The elimination of deferred revenue was due to our satisfaction of the obligations related to a particular government contract and the satisfaction during the nine months ended December 31, 2006 of our remaining $4,863 in obligations under a prepayment under our 2001 agreement, as amended, with Agilent Technologies, Inc.
We completely retired our capital lease obligations in June 2006, eliminating all of our debt. Capital lease obligations were $33,281 at March 31, 2006.
We made capital expenditures of $252,604 in the nine months ended December 31, 2006, primarily for equipment to increase our capabilities for the testing and processing of very small components that we sell. We evaluate capital investments as needs and opportunities arise so our capital expenditures could deviate significantly from our expectations. We will likely fund future capital expenditures from operating profits or our cash and cash equivalents.
We believe our working capital is adequate for our needs at least for the next 12 months.
Our outlook
Inventory levels industry-wide are high by some metrics, and this could tend to reduce our product sales in the first half of calendar 2007 if stocking distributors reduce their purchases to reduce their inventories. Contract research and development revenue will likely continue to decrease in the fourth quarter of fiscal 2007 compared to the prior year due to more limited Government research funds, our ongoing shift in emphasis from contract-funded to company-funded research, particularly new product development, and our ongoing focus of contract research on certain strategic areas.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents, short-term and long-term investments in a variety of securities, including government obligations, corporate obligations, and money market funds. Short-term and long-term marketable securities are generally classified as available-for sale-and consequently are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of estimated tax. Our investments as of December 31, 2006 had remaining maturities between three and 59 months. Available-for-sale securities had a market value of $15,549,236 at December 31, 2006, representing approximately 67% of our total assets.
Item 4. Controls and Procedures.
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 (the "Exchange Act") reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we are required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this Report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. There was no change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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See Item 1A for information regarding legal proceedings.
Other than with respect to the risk factors below, there have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2006 as updated in Item 1A of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006. The risk factors below were disclosed on the Form 10-K and updated in Item 1A of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2006. It is being updated in light of incursion of expenses in order to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the consolidation of derivative actions filed in Hennepin County District Court related to class action litigation during the quarter covered by this Report.
While we believe
that we currently have adequate internal control over financial reporting in
place, in the future we expect our management will be required to evaluate our
internal control over financial reporting under Section 404 of the Sarbanes-Oxley
Act of 2002 and any adverse results from such evaluation could result in a loss
of investor confidence in our financial reports and have an adverse affect on
our financial results and the market price of our common stock.
As required by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring each public company to include a management report assessing the effectiveness of its internal control over financial reporting in Annual Reports on Form 10-KSB or 10-K, and the independent registered public accounting firm auditing such company’s financial statements must attest to and report on management’s assessment of the effectiveness of the internal control over financial reporting. We expect this requirement to apply to our Annual Report for the fiscal year ending March 31, 2007 because we appear to have met the criteria for being an “Accelerated Filer” as of September 30, 2006. Under current regulations we will also be required to comply with Section 404 in our Annual Report for the fiscal year ending March 31, 2008. While we currently anticipate being able to fully implement the requirements relating to compliance with Section 404 in a timely fashion, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of such activities on our operations due in large part to the lack of precedent available by which to measure compliance with such requirements. We have incurred significant expenses in order to comply with the requirements and could incur significant additional expenses. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the market price of our common stock. In addition, to the extent we or our independent registered public accounting firm identify a significant deficiency in our internal control over financial reporting, the resources and costs required to remediate such deficiency could have a material adverse impact on our future results of operations.
We are presently involved in class action litigation.
On February 10, 2006 a lawsuit was filed against NVE and certain of its current and former executive officers and directors in the U.S. District Court for the District of Minnesota by an individual shareholder seeking to represent a class of purchasers of our common stock during the period from May 22, 2003 through February 11, 2005. On March 6 and March 7, 2006, two additional lawsuits were filed in the same court by two additional NVE shareholders, with the same proposed class period, purporting to represent the same class. These lawsuits were subsequently consolidated into a single case and a consolidated complaint was filed. The consolidated complaint generally alleges that the defendants violated the Securities Exchange Act of 1934 by issuing material misrepresentations concerning NVE’s projected revenues and product technology, which artificially inflated the market price of our common stock. Two related actions brought by individual shareholders who seek to represent NVE derivatively have been filed in Hennepin County District Court. These related actions were subsequently consolidated into a single case and an amended derivative complaint was filed. The amended derivative complaint generally alleges that certain officers and directors violated their fiduciary duties to the company. We believe the lawsuits are wholly without merit and intend to vigorously defend the actions. We have incurred and expect to continue to incur legal expenses related to these lawsuits. Although insurance may cover a portion of any judgments, if we do not prevail in these lawsuits we may be required to pay substantial amounts which could have a material adverse impact on our future results of operation and financial condition.
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Item 6. Exhibits.
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Exhibit
#
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Description
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31.1
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Certification by Daniel A. Baker pursuant to Rule 13a-14(a)/15d-14(a).
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||
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31.2
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Certification by Curt A. Reynders pursuant to Rule 13a-14(a)/15d-14(a).
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32
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Certification
by Daniel A. Baker and Curt A. Reynders pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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NVE CORPORATION |
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(Registrant) |
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January
17, 2007
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/s/
DANIEL A. BAKER
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Date
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(Signature) |
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Daniel
A. Baker
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President and Chief Executive Officer |
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January
17, 2007
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/s/
CURT A. REYNDERS
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Date
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(Signature) |
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Curt
A. Reynders
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Chief Financial Officer |